Well, it had to happen sooner or later, but a slump in big tech names is dragging global equity markets lower, seeing the S&P500 down about 4%. The flight to safety sees slightly lower US Treasury yields and stronger safe-haven currencies, while commodity currencies are weaker.
The equity market has been well overdue for a hiding and without any obvious trigger, today is the day. Technical indicators were looking stretched after some rapid gains in equities, for example the RSI for the S&P500 was up at around 83 yesterday (the 70 threshold is usually used as a signal of being over-bought). Equities showed modest falls on the open and the fall has extended as the trading day continues, with the S&P500 currently down about 4% and the Nasdaq composite down over 5% as the tech sector leads the falls.
The question now is how much further the market needs to fall before the “buy-the-dip” mentality sets in and the market recovers, or whether a more meaningful 10%+ correction is on the cards. As it stands, the S&P500 is only back to where it was at the middle of last week, so the overnight fall should be seen in that context.
The fall in US equities spilled over into other markets. The Euro Stoxx 600 index was enjoying a good day, but ended down 1.4%. The flight to safety has seen the US Treasuries yield curve lower and flatter, although with only modest falls, with the biggest move being a 4bp fall in the 30-year to 1.34%. The 10-year rate fell to as low as 0.60%, a 3-week low, but is now down only 3bps at 0.62%.
On the economic front, US jobless claims weren’t as bad as expected, jumping by “only” 881k but the switch to an additive rather than multiplicative seasonal adjustment methodology might account for the gap. Under the previous method, the figure would have been some 140k higher. The key takeout is that the figures are still very large, above the worst levels seen during the GFC so any possible improvement in the labour market should be seen in that context.
The US ISM services index fell slightly, in line with expectations, still indicative of economic recovery but a bumpy one. The breakdown was mixed, showing an 11pt fall to 56.8 in new orders, but a nearly 6pt rise in the employment index to a 6-month high, albeit still sub-par at 47.9. In other economic news, the US trade deficit widened to its largest level since 2008.
The Fed’s Evans gave a sobering outlook for the US economic recovery, saying that its path will “critically depend on receiving substantial additional support from fiscal policy” and even then, alongside progress in controlling the virus, “it will be some time before the economy recovers from the hit it took”. Evans was evidently a fan of outcome-based policy guidance and he indicated that such “forward guidance for the rate path and asset purchases could be beneficial in the not-too-distant future”.
On the fiscal front, Bloomberg reports that Treasury secretary Mnuchin and House speaker Pelosi have agreed to a “clean” stopgap funding bill free of stimulus that would help avoid a government shutdown. But this does nothing to support the recovery and we note Senate Majority Leader McConnell’s mid-week comments expressing doubts about whether Congress can get a deal on another pandemic relief package.
In currency markets, safe havens have outperformed, with JPY and CHF outperforming. USD/JPY touched 106.00 this morning where it found support. EUR has regained some poise after its two-day sell-down. After falling as low as 1.1790, it is back up to 1.1855. The FT reported that “several members” of the ECB governing council told it that the euro’s rise against the dollar and many other currencies risks holding back the eurozone’s economic recovery. One member added that the US Fed’s strategic shift to target average 2% inflation added to the pressure on the ECB to respond with its own strategy review.
Commodity currencies are at the bottom of the leaderboard, the NZD being the worst performing down 0.8% since this time yesterday and most of that fall coming after the NZ close. Its path over coming weeks will likely be determined by how this US equity market shakeout pans out. The NZD is currently just above the low seen of 0.6694. The AUD is currently 0.7275, with NZD/AUD down to 0.9215. NZD/EUR has been the biggest mover on the crosses, down about 1% since this time yesterday to 0.5655.
Focus tonight turns to US non-farm payrolls, where the consensus is picking another strong increase in employment (1350k), but in these unusual times the range of estimates remains wide at -100k to +2400k. taking the unemployment rate down to 9.8%.